IRS issues guidance revising group trust rules to include broader spectrum of retirement plans.

Part I

Section 501. -- Exemption From Tax on Corporations, Certain Trusts, Etc.

26 CFR 1.501(a)-1: Exemption from taxation.

(Also, §§ 401, 403; 1.401(a)-2, 1.403(b)-8.)

PURPOSE

This revenue ruling modifies the rules for group trusts described in Rev. Rul. 81-100, 1981-1 C.B. 326, as clarified and modified by Rev. Rul. 2004-67, 2004-2 C.B. 28. The modifications revise the generally applicable rules for these group trusts and, if certain requirements are met, permit the participation in group trusts of custodial accounts under § 403(b)(7), retirement income accounts under § 403(b)(9), and governmental retiree benefit plans under § 401(a)(24). In addition, this revenue ruling provides related model language that may be used by group trusts to comply with these new provisions. This revenue ruling also modifies the transition relief provided in Rev. Rul. 2008-40, 2008-2 C.B. 166, relating to plans qualifying under section 1165 of the Puerto Rico Internal Revenue Code (Puerto Rico Code).

ISSUE

Under what conditions may the assets of qualified plans under § 401(a), individual retirement accounts (IRAs) under § 408 (including Roth IRAs under § 408A), and eligible governmental plans under § 457(b) be pooled in a group trust described in Rev. Rul. 81-100 with the assets of custodial accounts under § 403(b)(7), retirement income accounts under § 403(b)(9), and governmental plans under § 401(a)(24) without affecting the tax status of these entities or the group trust?

LAW AND ANALYSIS

Section 401(a) provides that a trust created or organized in the United States and forming a part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of its employees or their beneficiaries is qualified if it meets certain requirements. Section 401(a)(1) provides that one of these requirements is that contributions be made to the trust by the applicable employer or employees, or both, for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated in accordance with such plan. Section 501(a) provides, in part, that a trust described in § 401(a) is exempt from income tax. Section 401(a)(2) provides, in part, that under each trust instrument it must be impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the plan and the trust, for any part of the corpus or income of the trust to be used for or diverted to purposes other than for the exclusive benefit of the employees or their beneficiaries. Similarly, § 408 provides that an IRA means a trust created or organized "for the exclusive benefit of an individual or his beneficiaries" and § 457(g) provides that the assets of an eligible governmental plan under § 457(b) must be held in trust "for the exclusive benefit of participants and their beneficiaries."

Section 401(a)(24) provides that any group trust that otherwise meets the requirements of § 401(a) does not fail to satisfy such requirements due to the participation or inclusion of the monies of a plan or governmental unit described in § 818(a)(6) in the group trust. Section 818(a)(6) contains special rules regarding the definition of the term "pension plan contract." Section 818(a)(6)(A) defines the term to include a contract purchased by a governmental plan (within the meaning of § 414(d)) and an eligible governmental plan under § 457(b). Section 818(a)(6)(B) further defines the term to include a contract purchased by the Government of the United States, the government of any state or political subdivision thereof, or by any agency or instrumentality of the foregoing, or any organization (other than a governmental unit) exempt from tax under subtitle A (income taxes), for use in satisfying an obligation of such government, political subdivision, agency, instrumentality, or organization to provide a benefit under a plan described in § 818(a)(6)(A).¹

Section 401(f)(1) provides that a custodial account, an annuity contract, or a contract (other than a life, health or accident, property, casualty, or liability insurance contract) issued by an insurance company qualified to do business in a State is treated as a qualified trust under § 401 if the custodial account or contract would constitute a qualified trust under § 401, except for the fact that it is not a trust. Section 401(f)(2) requires that the assets in any such custodial account are to be held by a bank within the meaning of § 408(n) or "another person" that demonstrates that it will hold the assets in a manner consistent with the requirements of § 401. See § 1.408-2(e) of the Income Tax Regulations for rules regarding nonbank trustees.

Section 403(b) generally provides that amounts contributed by an employer for an annuity contract are excluded from the gross income of the employee for the taxable year if certain requirements are satisfied. Section 403(b) applies to contributions made: for an employee by an employer described in § 501(c)(3) which is exempt from taxation under § 501(a); for an employee who performs services for an educational organization described in § 170(b)(1)(A)(ii) by an employer which is a State, a political subdivision of a State, or an agency or instrumentality of any one of the foregoing; or for a minister described in § 414(e)(5)(A) by the minister or by an employer.

Section 403(b)(7)(A) provides, in part, that amounts paid by an employer described in § 403(b)(1) to a custodial account which satisfies the requirements of § 401(f)(2) are treated as amounts contributed for an annuity contract for the employee if the amounts are to be invested in regulated investment company stock to be held in that custodial account. Section 403(b)(7)(B) provides that a custodial account which satisfies the requirements of § 401(f)(2) is treated as an organization described in § 401(a) solely for purposes of subchapter F of chapter 1 of subtitle A of the Code (§§ 501-530) and subtitle F of the Code (pertaining to procedure and administration) with respect to amounts received by the account and with respect to income from the investment of these amounts. Section 1.403(b)-8(d)(2)(i) provides that all of the amounts held in the account must be invested in the stock of a regulated investment company (as defined in § 851(a)). Section 1.403(b)-8(d)(2)(i) provides that the assets of a custodial account under § 403(b)(7) cannot be commingled in a group trust with any assets other than those of a regulated investment company described in § 851(a). Section 1.403(b)-8(d)(2)(iii) provides that a custodial account under § 403(b)(7) must contain a written statement that the assets held in a custodial account cannot be used for, or diverted to, purposes other than for the exclusive benefit of plan participants or their beneficiaries.

Section 403(b)(9) provides that a retirement income account is treated as an annuity contract and amounts paid by an employer described in § 403(b)(1)(A) to a retirement income account are treated as amounts contributed to an annuity contract for the employee. Section 403(b)(9)(B) provides that a retirement income account means a defined contribution program established or maintained by a church, or convention or association of churches, including an organization described in § 414(e)(3)(A), to provide benefits under § 403(b) for an employee described in § 403(b)(1) or the employee's beneficiaries. Section 1.403(b)-9(a)(2)(i) requires separate accounting for the retirement income account's interest in the underlying assets, and that a § 403(b)(9) retirement income account contain a written statement that the assets held in the retirement income account cannot be used for, or diverted to, purposes other than for the exclusive benefit of plan participants or their beneficiaries.

Rev. Rul. 81-100, as clarified and modified by Rev. Rul. 2004-67, holds that if specified requirements are satisfied, a group trust is exempt from taxation under § 501(a) with respect to its funds which equitably belong to participating trusts described in § 401(a) and is exempt from taxation under § 408(e) with respect to its funds which equitably belong to IRAs. Rev. Rul. 81-100, as clarified and modified by Rev. Rul. 2004-67, sets forth the following requirements for a group trust: (1) the group trust must be adopted as a part of each adopting employer's plan or each adopting individual retirement account; (2) the group trust instrument must expressly limit participation in the group trust to pension, profit-sharing, and stock bonus trusts or custodial accounts qualifying under § 401(a) that are exempt under § 501(a), individual retirement accounts that are exempt under § 408(e), and eligible governmental plan trusts or custodial accounts under § 457(b) that are exempt under § 457(g) (adopting entities); (3) the group trust instrument must prohibit any part of its corpus or income that equitably belongs to any adopting entity from being used for or diverted to any purpose other than for the exclusive benefit of the employees (and the individual for whom an individual retirement account is maintained) and their beneficiaries who are entitled to benefits under such adopting entity; (4) the group trust instrument must prohibit the assignment by an adopting entity of any part of its equity or interest in the group trust; and (5) the group trust must be created or organized in the United States and be maintained at all times as a domestic trust in the United States.

To ensure that the assets of a group trust described in Rev. Rul. 81-100, as clarified and modified by Rev. Rul. 2004-67 (generally referred to hereinafter as an 81-100 group trust), are only commingled with the assets of similar plans or arrangements, each entity adopting the group trust must be tax-exempt under § 501(a) of the Code (or not subject to Federal income taxation) and must be part of a plan that satisfies an exclusive benefit rule that is similar to the exclusive benefit rule of § 401(a) and § 1.401(a)-2, as more fully described in paragraph (5) of the Holding of this revenue ruling. For this purpose, the group trust must also keep separate records of each adopting entity's interest in the group trust, as more fully described in paragraph (6) of the Holding of this revenue ruling.

The Service has received several inquiries as to whether a governmental plan that provides retiree welfare benefits will be treated as a plan described in § 401(a)(24) and may invest in an 81-100 group trust. Section 401(a)(24) applies to governmental plans that provide pension benefits and to governmental plans that provide other employee benefits for retirees such as retiree welfare benefits (a § 401(a)(24) governmental plan). Accordingly, a governmental plan providing retiree welfare benefits may be treated as a governmental plan under § 401(a)(24) and may invest in an 81-100 group trust.

The Service has also received inquiries as to whether a plan described in section 1022(i)(1) of the Employee Retirement Income Security Act of 1974 (ERISA) (a section 1022(i)(1) plan) may participate in an 81-100 group trust. Some of these inquiries have arisen in the context of Rev. Rul. 2008-40, which holds that a transfer of assets and liabilities from a qualified plan to a plan that satisfies section 1165 of the Puerto Rico Code is treated as a distribution from the transferor plan, even if the recipient plan is described in section 1022(i)(1) of ERISA. Rev. Rul. 2008-40 also provides, however, that this holding is not effective for a transfer if the date of the transfer is before January 1, 2011. The inquiries state that sponsors of qualified plans currently participating in 81-100 group trusts want to transfer assets and liabilities to section 1022(i)(1) plans prior to January 1, 2011, but are concerned that such plans may not be able to participate in an 81-100 group trust. If a section 1022(i)(1) plan is not permitted to participate in an 81-100 group trust then, upon a transfer of assets and liabilities from a qualified plan to a section 1022(i)(1) plan prior to January 1, 2011, pursuant to the relief set forth in Rev. Rul. 2008-40, the assets that are transferred to a section 1022(i)(1) plan that were previously invested in the 81-100 group trust will need to be distributed to the plans from the group trust and the plans will lose the advantages of participating in the group trust.

Section 4042(d) of ERISA authorizes the Pension Benefit Guaranty Corporation (PBGC) as statutory trustee to take control of the assets of a terminated plan. Under ERISA section 4042(a), the PBGC maintains certain commingled trust funds to hold and invest such assets upon becoming statutory trustee. These commingled trust funds are limited to (i) assets attributable to terminated tax-qualified defined benefit plans for which the PBGC has become statutory trustee, and (ii) assets transferred to the PBGC under ERISA section 4050 from terminated tax-qualified plans which, under ERISA section 4050(a)(2), are treated as assets attributable to terminated tax-qualified defined benefit plans for which the PBGC has become statutory trustee. Thus, from time to time, a group trust may hold assets attributable to PBGC's commingled trust funds.

HOLDING

Accordingly, on or after January 10, 2011, provided that the requirements below are satisfied, the assets of qualified plans under § 401(a), IRAs, and eligible governmental plans under § 457(b) may be pooled in a group trust described in Rev. Rul. 81-100, as clarified and modified by Rev. Rul. 2004-67 and this revenue ruling, with the assets of custodial accounts under § 403(b)(7), retirement income accounts under § 403(b)(9), and § 401(a)(24) governmental plans without affecting the tax status of the group trust or the tax status of each of the separate group trust retiree benefit plans participating in the group trust. For purposes of this revenue ruling, all of the entities listed in the preceding sentence are collectively referred to as "group trust retiree benefit plans."

A custodial account under § 403(b)(7) will fail to satisfy § 1.403(b)-8(d)(2)(i) if the assets of the account are invested other than in the stock of a regulated investment company, and any group trust in which the assets of a § 403(b)(7) custodial account is invested must comply with this restriction. Accordingly, as a result of this investment restriction, the assets of a custodial account under § 403(b)(7) generally will be commingled in a group trust that solely contains the assets of other § 403(b)(7) custodial accounts.

If the requirements below are satisfied, the tax status of the group trust will be derived from the tax status of the participating entities to the extent of their equitable interests in the group trust. Thus, for example, a group trust is exempt from taxation under § 501(a) with respect to the assets of the group trust which equitably belong to participating trusts described in § 401(a) that are exempt from tax under § 501(a).

The requirements are as follows:

MODEL AMENDMENTS

There are two model amendments set forth below. Amendment 1 is for a group trust that received a determination letter from the Service prior to January 10, 2011, that the group trust satisfies Rev. Rul. 81-100, but that does not satisfy the separate account requirement of paragraph (6) of the Holding in this revenue ruling. Amendment 2 is for a group trust that received a determination letter from the Service prior to January 10, 2011,that the group trust satisfies Rev. Rul. 81-100, and that intends to permit custodial accounts under § 403(b)(7), retirement income accounts under § 403(b)(9), or § 401(a)(24) governmental retirement plans to participate in the group trust. Both model amendments should be adopted by group trusts that do not satisfy the separate account requirement and intend to permit custodial accounts under § 403(b)(7), retirement income accounts under § 403(b)(9), or § 401(a)(24) governmental retirement plans to participate in the group trust.

AMENDMENT 1 -- GROUP TRUSTS THAT DO NOT SATISFY THE SEPARATE ACCOUNT REQUIREMENT

In general, group trusts that have received favorable determination letters from the Service currently satisfy the separate account requirement of paragraph (6) of the Holding in this revenue ruling. However, a sponsor of a group trust that satisfies Rev. Rul. 81-100, as modified by Rev. Rul. 2004-67, but that does not currently provide for separate accounts, must amend its group trust instrument by January 10, 2012,to provide for separate accounts as required under this revenue ruling. A sponsor of a group trust may satisfy this requirement by amending its group trust instrument to include the model language below:

A sponsor of a group trust that satisfies Rev. Rul. 81-100, as modified by Rev. Rul. 2004-67, may amend its group trust instrument to include the model language below to reflect this revenue ruling:

If a group trust instrument provides that amendments to the group trust will automatically pass-through to the group trust retiree benefit plan, and the trustee of the group trust is otherwise entitled to rely on a favorable determination letter issued to it prior to January 10, 2011, regarding eligibility of its group trust under Rev. Rul. 81-100, the group trust trustee will not lose its right to rely on its determination letter merely because it adopts Model Amendment 1 or Model Amendment 2 set forth above in this revenue ruling on a word-for-word basis (or adopts an amendment that is substantially similar in all material respects). Thus, such a trustee may adopt Model Amendment 1 or Model Amendment 2 on a word-for-word basis (or adopt an amendment that is substantially similar in all material respects) and continue to rely on the previously issued determination letter regarding its group trust without filing a request with the Service for a new determination letter.

A trustee of a group trust that satisfies the above requirements and amends its group trust to include Model Amendment 1 or Model Amendment 2 on a word-for-word basis (or adopts an amendment that is substantially similar in all material respects) will also not lose its right to rely on its prior determination letter merely because it becomes necessary, as a result of the adoption of such model amendment (or an amendment that is substantially similar in all material respects), to modify or delete a prior provision that is inconsistent with the model amendment so adopted (or an amendment that is substantially similar in all material respects that is so adopted).

Generally, the group trust instrument will provide that amendments to the group trust will automatically pass through to the group trust retiree benefit plans. However, a group trust that has received a favorable determination letter under Rev. Proc. 2010-6, 2010-1 I.R.B. 193 (or its predecessors), that does not contain such a pass-through provision may not adopt Model Amendment 1 or Model Amendment 2 and automatically continue to rely on its determination letter.

PLANS DESCRIBED IN SECTION 1022(i)(1) OF ERISA

The Service anticipates issuing guidance as to whether a plan described in section 1022(i)(1) of ERISA may participate in an 81-100 group trust. Until such guidance is issued, the Service will not treat a group trust as failing to satisfy the requirements of this revenue ruling merely because the group trust includes the assets of a section 1022(i)(1) plan as long as the section 1022(i)(1) plan (1) was participating in the group trust as of January 10, 2011,or (2) holds assets that had been held by a qualified plan immediately prior to the transfer of those assets to the section 1022(i)(1) plan pursuant to the transition relief in Rev. Rul. 2008-40, as modified by this revenue ruling. In addition, Rev. Rul. 2008-40 is hereby modified to extend the transition relief for transfers from a qualified plan to a section 1022(i)(1) transferee plan for an additional year. Thus, "January 1, 2012" is substituted for "January 1, 2011" each place it appears in the Transition Relief section of Rev. Rul. 2008-40.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 81-100, Rev. Rul. 2004-67, and Rev. Rul. 2008-40 are modified.

REQUEST FOR COMMENTS

The IRS requests comments on whether annuity contracts and/or other tax-favored accounts held by plans described in § 401(a) or § 403(b), such as pooled separate accounts supporting annuity contracts that are treated as trusts under § 401(f), should be permitted to invest in the group trusts described in this revenue ruling. Comments should be submitted by April 11, 2011, to CC:PA:LPD:PR (Rev. Rul. 2011-1), Room 5203, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, D.C. 20044. Comments may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Rev. Rul. 2011-1), Courier's Desk, Internal Revenue Service, 1111 Constitution Ave., N.W., Washington D.C. Alternatively, comments may be submitted via the Internet at Notice.comments@irscounsel.treas.gov. Please include "Rev. Rul. 2011-1" in the subject line of any electronic communication. All materials submitted will be available for public inspection and copying.

DRAFTING INFORMATION

The principal author of this revenue ruling is Robert Walsh of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, please contact the Employee Plans' taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number) between the hours of 8:00 a.m. and 4:30 p.m. Eastern Time, Monday through Friday, or e-mail Mr. Walsh at RetirementPlanQuestions@irs.gov.